Question

1. Give an example of a situation in which the outcome is inefficient equi- librium. Explain carefully why the outcome in your example is both an equilibrium and Pareto inefficient. [3 points]

   Note: Your example should be of a real world situation, rather than just a variant of the static general equilibrium model. A simple example with a clear explanation is much better than a complicated example that is hard to explain.

2. What are the advantages and disadvantages of competitive equilibrium approaches? Explain. [3 points]

3. Why does the wage equal the marginal product of labour at an optimum in the firm’s problem? [3 points]

4. Evaluate the following claim in the context of the static general equi- librium with production: “An increase in the wage causes consumption to rise.” [3 points]

Answer 1

In general term inefficiency mean lack of efficiency. The same way inefficiency in Economy denotes the lack of efficiency in the economy. Without doubt we can say that the output of inefficiency will be zero. In efficiency in equilibrium is another important factor. Equilibrium is the situation where the total demand is equal to total supply. So inefficient equilibrium means lack of proper demand in companies product. Why customers are not demanding the product is an important question. Lack of technological improvent , Lack of implimenting latest innovation in product...etc are the major reason for this situation. For example lets take the cellpnone company NOKIA . once upon a time they are in top level but now they lost their market people kick them out why? the answer is they where not updated their self.

Pareto optimality is a situation that tells there is no way for making one person better without making another worse. The pareto inefficiency is the opposit of this .

Advantages of competative equilibrium

1) Helps to attain competative advantage

2) Helps to attain more profit from market

3) Helps to make favourable environment

Disadvantage of competative equilibrium

1) It make more rivelry between companies

2) Make unethical business

3) make un fare trade practices

Reason for wage equal to productivity of employee

1) In order to controll over flow of revenue to outside the country

2) It helps to identify efficient labour and pay them best compensation

3) To make employees encouragement level high

Answer for the last claim

When workers getting a wage hike their living condition will improve and their disposible income will become high. They demand more goods and services. So their consumption will rise accordingly.